Clarifying circular regarding the transfer of business losses to subsequent tax years when calculating income tax, AADE has issued.
The result of the above provision means that the losses of a business will be offset against the possible profits in the following tax years, when the income tax is calculated.
Thus, it is stipulated that if the determination of profits from business activity results in a loss within the tax year, this loss is carried forward to be set off against the business profits in the next five tax years consecutively, and that the loss of the previous year is set off against priority over later year loss.
Therefore, the loss carried forward is offset in any case against the declared profits from business activity, although it is emphasized that for the comparison of assumed and declared income the declared profits from business activity of each tax year are taken into accountbefore offsetting them with any carry forward loss from previous years.
Following the above, in case there are declared net profits from the exercise of business activity and carried forward loss from previous years:
a) if the minimum amount of net income exceeds the declared profits from business activity, the tax is determined on this income, and the carried forward loss of previous years is set off against the declared profits and if there is a balance of loss, it is carried over to the following years.
b) if the amount of the declared profits exceeds the minimum amount of net income, the tax is determined on these profits, after offsetting them with any carried forward loss from previous years, even if the final amount that will result falls short of the minimum net income, if not loss balance remains, this is carried over to subsequent years.
Furthermore, in case there is a declared loss of the current year from the exercise of business activity and a carried forward loss of previous years, the tax is determined on the minimum amount of net income, and the carried forward loss of previous years is added to the declared loss of the current year and carried forward successively to the next 5 tax years to set off.
Examples
In order to better inform taxpayers, the circular also includes specific examples. Analytically:
1. A sole proprietorship shows losses for the tax years 2021 and 2022, while for the tax year 2023 profits from business activity.
Suppose that in the tax year 2023, the minimum annual income was determined at 25,000 euros, then the minimum annual income (25,000 euros) exceeds the declared profits (20,000 euros) and therefore the tax is determined on this income. The loss carried forward from previous years (13,000 euros) is set off against the declared profits (20,000) and there is no balance of losses to carry forward to the following years.
2. A sole proprietorship shows losses for the tax years 2021 and 2022, while for the tax year 2023 profits from business activity.
Suppose that in the tax year 2023, the minimum annual income was determined at 25,000 euros, then the declared profits (30,000 euros) exceed the minimum annual income (25,000 euros) and therefore the tax is determined on the declared profits, after first being offset by the loss of previous years.
Therefore, in this case, the tax is determined on an income of 17,000 euros (30,000 – 13,000), even though the amount resulting after offsetting (17,000 euros) is less than the minimum annual income (25,000 euros).
3. A sole proprietorship shows losses for the tax years 2021 and 2022, while for the tax year 2023 profits from business activity.
Suppose that in the tax year 2023, the minimum annual income was determined at 25,000 euros, which exceeds the declared profits (20,000 euros) and therefore the tax is determined on this income. The carried forward loss of previous years (23,000) is offset against the declared profits and the remaining loss amount of 3,000 euros (20,000 – 23,000) is carried forward to the following years.
4. A sole proprietorship presents business losses for the tax years 2021, 2022 and 2023.
Suppose that in the tax year 2023 the minimum annual income was determined at 25,000 euros, then, the tax is determined on the minimum annual income and the carried forward loss of previous years (13,000 euros), after first being aggregated with the losses of use (15,000 euros), i.e. amount 28,000 euros (15,000+13,000), carried over to the following years.
